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Friday, May 26, 2017

Petronm: A 6x PE stock generating 30% ROE with a clean balance sheet!

Author: sumato88 | Publish date: Thu, 25 May 2017, 08:15 PM

Petronm's 1Q17 result was indeed fanstastic, delivering another hundred million quarterly profit! This is the 2 consecutive quarters of more than hundred million quarterly profit which makes my RM400m FY17 profit forecast achievable. I mentioned in my last quarter results commentary that 1Q17 will be an equally strong quarter if not stronger, judging from the improved refinery margin and growing retail volume. If crude oil price wasn't weaker qoq, 1Q17 results could have been stronger.

1Q17 Sales volume continue to grow +7% yoy, a commendable growth as compared to market leader, Petronas Dagangan which recorded -4% yoy volume contraction in 1Q17. Petronm is one step closer to the market leader as it continue to gain market share while paring down borrowings (1Q17 net debt was only RM47m or 2% of its market cap). I must say the management has indeed done a great job by turning around the biz since it took over in 2012 (back then Petronm was loss making with RM870m net debt).

So what's next? I believe Petronm is firmly on the right track to achieve record profit (RM400m, +68% yoy) in 2017, thanks to sustain refinery margin and growing retail sales volume. I would like to predict again, 2Q17 results should be equally strong if not stronger as compared to 1Q17. To achieve a RM400m profit for the full year, each quarter Petronm just need to deliver a minimum profit of RM100m. Anything extra will be a bonus and served as a buffer for the subsequent quarter.

If Petronm deliver RM400m profit, the company will turn net cash (judging from this pace, probably 2Q17 will turn net cash already) and generate 30% return on equity for shareholders (shareholder equity stood at RM1.2bn as at 1Q17). So what's the fair value for the stock?

If you follow my previous analysis, you should know I believe Petronm is a mix of Hengyuan (refinery) and Petronas Dagangan (retail and marketing). Hence, let's compare the Enterprise Value of the 3. Hengyuan's enterprise value is RM2.8bn (RM1.74bn market cap + RM1.1bn net debt) while PetDag's EV is RM22bn, both also higher than Petronm's EV of RM2.4bn. So now you ask yourself, how much does a growing retailer (vs PetDag who is losing market share and trading at 23x PE) and a clean refinery (vs Hengyuan's highly geared balance sheet of 1x net gearing) worth?

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